Commissioner o Effectively connected – not necessary that the income be
September 14, 1989| Fernan, J| Kinds of Income Tax Payers derived from the actual operation of [Marubeni’s] trade or Digester: Ortega, Ige business; it is sufficient that the income arises from the business activity in which the corporation is engaged. DOCTRINE For example, if a resident foreign corp is engaged in buying and selling machineries in the PH and invests shares of The General Rule that a foreign corporation is the same juridical entity as its stock on which dividends are subsequently received, the branch office in the PH cannot apply in Marubeni’s case. dividends thus earned are not considered effectively connected with its trade or business. This rule is based on the premise that the business of the foreign corporation Marubeni filed for a refund/tax credit of P229,424 paid by AG&P. is conducted through its branch office, following the principal agent o DENIED. Commissioner said that while it couldn’t be relationship theory. It is understood that a branch becomes its agent here. imposed the 15% tax because of the discussion above, and because it cannot be taxed with 10% inter-corporate Hence when a foreign corp transacts business in the PH independently of the dividend tax, being a non-resident stockholder. branch (i.e. investing in AG&P), such agency is set-aside. The transaction is o It could still be taxed with 25% tax pursuant to a tax treaty one made by the foreign corporation, not the branch. between the PH and Japan. o Paid 10% and 15% offsets the actual tax of 25% FACTS CTA affirmed the denial on appeal. Marubeni Corporation, incorporated in Japan, has equity investments o No doubt na taxable income. Said dividends were in AG&P of Manila. distributions made by the Atlantic, Gulf and Pacific Company o Licensed to engage business in PH. Office in Intramuros. of Manila to its shareholder out of its profits on the o 1st Quarter of 1981 ending March 31, AG&P declared and investments of the Marubeni Corporation of Japan paid cash dividends to petitioner in the amount of P849,720 o Direct investment and direct remittance to and from AG&P . and withheld the corresponding 10% final dividend tax. o Subject to certain exceptions not pertinent hereto, income is o 3rd Quarter of 19871 ending September 30, AG&P declared taxable to the person who earned it. Admittedly, the the same. Same amounts and tax. dividends under consideration were earned by the Marubeni AG&P remitted the cash to Marubeni’s office in Tokyo, Japan. Corporation of Japan, and hence, taxable to the said However, the amount given was net not only of the final dividend corporation. While it is true that the Marubeni Corporation tax but also a 15% profit remittance tax based on the remittable Philippine Branch is duly licensed to engage in business amount after deducting the final withholding tax of 10%. under Philippine laws, such dividends are not the income of o See: Schedule. Out of the 849,720 dividends declared, only the Philippine Branch and are not taxable to the said 650,035 was received due to the two taxes Philippine branch. o The taxes were paid to the BIR by AG&P evidenced by two o CTA refused to consider the principal-agent relationship receipts theory proposed by petitioner, who said that the dividends o Total amount of branch profit remittance tax paid – are the income of and are taxable to the Philippine Branch. 229,424 Marubeni sought a ruling from the BIR whether or not the dividends Arguments Marubeni received are effectively connected with its conduct or Marubeni: Following the principal-agent relationship theory, Marubeni business in the Philippines as to be considered branch profits, is likewise a resident foreign corporation subject only to the 10% subject to the 15% tax under §24(b)(2) of the NIRC as amended. inter-corporate final tax on dividends received from a domestic corp. o Through the accounting firm Sycip, Gorres, Velayo, and Co. (§24(c)(1)) of the tax code of 1977. Hence in that sense (principal- BIR Acting Commissioner Ruben Ancheta ruled: agent), it is a resident foreign corporation o Under that section, only profits remitted abroad by a branch o Says na it engages in trade or business through its office to its head office which are effectively connected with Philippine Branch, which is one and the same entity as the its trade or business in the PH are subject to the 15% tax. Japan branch. o Says na a single corporate entity cannot be both a resident While CIR is correct in saying that Marubeni cannot be made to pay and non-resident corporation, depending on the nature of the the 10% and 15% taxes, di puwedeng no refund because of the transactions involved. 25% rate sa treaty. Hence, whether the dividends are paid to the Japan To simply add the two is to disregard a basic rule in tax that each tax office or to a branch in Manila is not important, has a different tax basis. because the head office and the branch o Tax on dividends: directly levied on dividends received constitute just one corporate entity, the Marubeni o Tax on remittance: profit actually remitted abroad. Corporation, which, under both PH tax and corporate Another error – the tax treaty text says that the 25% is actually the laws, IS A RESIDENT FOREIGN CORP because it maximum amount instead of a flat rate. “not exceeding” The proper is transacting business in the Philippines. rate to be used is the one found in §24(b)(1) of the treaty copy pasted Commissioner: Marubeni is a non-resident foreign corp and is not below. engaged in trade or business in the Philippines. Hence tax as per the o Non-resident foreign corps taxed at 35% of the gross income from special rate of 25% of the tax treaty between PH and Japan. all sources within the Philippines but a discounted rate of 15% is Solicitor General: The General Rule that a foreign corporation is the given to Marubeni on dividends received from a domestic corp same juridical entity as its branch office in the PH cannot apply here. (AG&P) on the condition that Japan gives Marubeni a tax credit of This rule is based on the premise that the business of the foreign not less than 20% of the dividends received (represents differenc corporation is conducted through its branch office, following the between 35% to 15%) principal agent relationship theory. It is understood that a branch becomes its agent here. Hence when a foreign corp transacts o ^the 15% of the be imposed is within the general ceiling of 25% as business in the PH independently of the branch (i.e. investing in mentioned in Art. 10(2)(b) of the tax treaty initially cited by the AG&P), such agency is set-aside. The transaction is one made CIR. by the foreign corp, not the branch. Notes Issues 1. Japan-PH Tax Treaty of 1980 (1) Is Marubeni a resident or non resident foreign corporation? a. Art. 10(2)(b) FOREIGN b. Sec. 24(b)(1) Tax on foreign corporations. — (1) Non-resident corporations — ... (iii) On dividends received from a domestic corporation liable to tax under this Discussion Chapter, the tax shall be 15% of the dividends received, which shall be Tax Code: resident foreign corporation is one engaged in trade or collected and paid as provided in Section 53 (d) of this Code, subject to the business within the Philippines. condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit against the tax due from the non-resident Held #1 foreign corporation, taxes deemed to have been paid in the Philippines equivalent to 20 % which represents the difference between the regular tax Non-resident considering the fact that the investment made by Marubeni was made for purposes particularly germane to the (35 %) on corporations and the tax (15 %) on dividends as provided in this conduct of Marubeni-Japan’s corporate affairs, but not of the Section; .... branch in the Philippines 2. Tax Code It is thus clear that petitioner, having made this independent Tax on non-resident Foreign Corporations investment attributable only to the head office, cannot now claim the (1) Non-resident corporations. — A foreign corporation not engaged in trade increments as ordinary consequences of its trade or business in the or business in the Philippines shall pay a tax equal to thirty-five per cent of PH, and avail itself of the lower tax rate of 10%. the gross income received during each taxable year from all sources within the Philippines as ... dividends .... But Tax on resident foreign corporation Dividends received by a domestic or resident foreign corporation liable to tax under this Code — (1) Shall be subject to a final tax of 10% on the total amount thereof, which shall be collected and paid as provided in Sections 53 and 54 of this Code ....